Marketable Permits for Water Quality: The Wisconsin Experience

1
Marketable Permits for Water Quality The
Wisconsin Experience

• Presentation by Donna Downing
• November, 2003

2
Overview of Presentation

• Market incentives and water quality trading
• The federal Clean Water Act context for water
  quality trading
• State of Wisconsin water quality permit trading
  program
• Program design and implementation
• Lessons learned

3
What is Water Quality Trading?

• Market-based approach that allows a source to
  meet a regulatory obligation by using pollutant
  reductions created by another source with lower
  pollution control costs
• Works within Clean Water Act regulatory framework
  
• Trading partners can include regulated point
  sources (discharging through a pipe), federally
  unregulated diffuse nonpoint sources, others

4
Water Quality and Marketable Permits

• Economic theory total pollution control costs
  will be lower if sources can buy and sell
  discharge rights
• Transfer of control responsibilities can occur
  many ways, including trading permit limits
• In Wisconsin, marketable permit program set up to
  allow facilities to buy and sell pollution
  discharge control responsibilities
• Federal and state requirements constrained
  Wisconsin program in several ways

5
Clean Water Act Context for Trading

• CWA requires permits for all facilities
  discharging pollution out of pipes or other
  discrete conveyances
• CWA permits set daily discharge limits
• Requires at least minimum effluent guidelines
  level of control
• Tighter limits imposed where effluent guidelines
  not enough to achieve water quality goals
• Permits life is no more than five years
• Every permit must indicate does not convey
  property right and can be revoked or altered

6
Clean Water Act Implemented Through Federal-State
Cooperation

• States can assume responsibility for CWA
  discharge permit program
• Issues permits, monitors compliance, enforces
  against violations
• States also are responsible for
• identifying those waters where effluent
  guidelines not enough to meet water quality
  goals, and
• determining what additional pollution control is
  necessary

7
Wisconsins Water Quality Challenge

• Wisconsin assumed the CWA permit program in the
  1970s
• Pollution challenge in 1980 was biochemical
  oxygen demand (BOD), discharged by numerous
  pulp-and-paper mills
• Permit limits set to achieve at least 5ppm
  dissolved oxygen (DO) in rivers
• BOD is similar to sewage, so mill treatment
  similar to municipal sewage treatment plants

8
Wisconsins Water Quality Challenge

• 14 paper mills and 2 municipal sewage treatment
  systems on 30-mile stretch of Fox River
• Allowable discharge in permit proportional to
  each mills paper production in base year
• In summer, required more than effluent
  guidelines level of pollution control
• Most stringent limits were 30-50 of effluent
  guidelines

9
Wisconsin Marketable Permit Program CWA
Requirements

• All point source discharge limits in permits
• All dischargers must meet effluent guidelines
• Buyers and sellers must impact same waters
• Permits must indicate no property right

10
Wisconsin Marketable Permit Program State
Constraints

• State must validate each trade
• Trade must exist for at least one year, and not
  more than five years (duration of the permit)
• Trading allowed only to accommodate new or
  increased production
• Trades which merely reduce pollution control
  costs not allowed

11
Use of Marketable Permits in Wisconsin

• Only one trade since program established in
  1980
• One small paper mill redirected its effluent from
  the stream to a sewage treatment plant
• Cheaper than mill building own treatment plant
• State lowered mills permit limits, raised sewage
  treatment plant limits
• Occurred prior to administrative codes limits on
  trades solely to lower treatment costs

12
When Will Water Quality Trading Fail?

• Pollution markets cannot function for wastes
• for which there is no acceptable level of
  discharge
• That bio-accumulate or cause long-term
  environmental damage
• Contrast BOD (some discharge acceptable) with
  heavy metals or toxics (goal of zero discharge)
• But, what happened in Wisconsin?

13
Potential Cost Savings Should Be Substantial

• Top management must agree trading is important to
  the company
• Treatment plant operators tend to resist trading
• On the Fox River
• Potential gains from trading not substantial,
  estimated at between 8 to 16 million in 1980
• This is probably no more than 1 of production
  costs for the paper mills

14
More Treatment Than the Minimum Is Required

• Discharge limits must be much more stringent than
  the effluent guidelines minimum level of
  control
• On the Fox River
• Effluent guideline level of control enough to
  meet water quality goals for most of the year
• During summer, the most stringent limits are 33
  to 50 of effluent guideline limits

15
Compliance Costs Differ

• Trading occurs only when some dischargers have
  lower treatment costs than others
• In theory, different sized firms with differently
  aged treatment facilities should face different
  costs
• On the Fox River
• Cost differences are not large
• Treatment facilities were either newly built or
  substantially upgraded between 1977 and 1980

16
Difficulty Meeting Allocation Limits

• Facilities will be more likely to trade if their
  equipment installed to meet effluent guidelines
  is not routinely enough to meet tighter limits
• On the Fox River
• Mills report they are having no difficulty
  meeting limits monitoring reports confirm this
• Treatment systems installed in 1979-80 somewhat
  larger than needed for effluent guidelines, and
  mills have been recycling water

17
Property Rights Must Be Certain

• Inherent conflict between certainty of property
  rights and governments need for additional
  pollution control
• For firms to trade, need to be certain of their
  rights to discharge pollutants
• Government needs to change limits if water
  quality requires it
• On the Fox River
• Permits last for 5 years, explicitly not property

18
Sufficient Buyers and Sellers

• Need assurance that opportunity to buy permits
  will continue to exist
• Requires multiple neighboring plants discharging
  similar pollutants
• No firm wants to think it will not expand future
  production
• On the Fox River
• 14 pulp-and-paper mills, 2 sewage treatment
  plants on 30-mile stretch discharging BOD
• But lack of trading casts doubt on future market

19
Transaction Costs Insignificant

• High transaction costs directly reduce the
  potential economic gains from trading
• On the Fox River
• High transaction costs possible, but unlikely
• All but one paper mill on the Fox are members of
  the Wisconsin Paper Council, providing ample
  information sharing opportunities

20
Administration Validation Is Quick

• A lengthy government review and approval process
  decreases potential gains from trading
• Firms very concerned about impact of delay on
  production
• On the Fox River
• Government review can be lengthy, since requires
  permit modification and associated public
  hearings
• WI Administrative Code places constraints on when
  trades may happen

21
Credible Enforcement

• Firms close to or exceeding limits will trade if
  violating permits more expensive than buying
  permission to discharge.
• CWA has no automatic penalties
• On the Fox River
• (and elsewhere in Wisconsin) Enforcement is
  credible and recurring as necessary
• Enforcement is not immediate, however

22
Summary

• Wisconsin set up the first water quality trading
  program in the U.S.
• Program has not been used much
• Potential value as safety valve
• Wisconsin experience suggests several factors
  affecting whether will be vigorous market
• Many of these factors can be investigated early
  in the design and implementation process

23
Summary, continued

• Potential cost-savings should be substantial
• Effluent limits should be tough to meet with
  technology installed to meet minimum required
  level of pollution control
• Facilities must face different effluent treatment
  costs (per pounds of removal)
• Property rights must be certain

24
Summary, continued

• Facilities must believe a water quality permit
  market will exist in the future
• Sufficient potential buyers and sellers must
  exist on the stream segment
• Transaction costs should be low
• Administrative validation should be quick
• Enforcement should be credible and timely